code recommends that the chairman of an investment trust should not be an employee or former employee of the management company
The AITC has published a code of corporate governance and proposes trusts adhere to it as a condition of association membership.
The code, based on research into members' attitudes towards corporate governance, includes guidelines on independence of directors and communication with shareholders, two key concerns raised by the Treasury Committee investigation into split capital trusts.
The association said it developed the code to address issues particular to investment trusts and closed-end investment companies that are not specifically covered by the Combined Code and the Higgs Review of company boards.
Among the key guidelines of the code is a recommendation that the chairman of an investment trust should not be an employee or former employee of the management company or a professional adviser to the manager.
Chairmen should also not serve on the boards of any other investment companies run by the same manager unless the other independent directors are prepared to make a specific appraisal of independence.
The AITC wants the majority of the board to be independent of the manager, with no more than one current or recent management employee on the board at one time.
This follows proposals released by the FSA earlier this month in consultation paper CP164, which proposed to prevent all employees of the investment manager from sitting on the board of the related investment trust.
In addition, the AITC has proposed that directors be elected for a fixed term of no more than three years, while nomination for re-election should not be assumed but be based on disclosed procedures. The code suggests the board regularly reviews both the performance and contract of the manager, although it suggests the long-term advantages of investing in closed-end structures make frequent management changes undesirable.
These are softer measures than those proposed by the FSA, which called for boards to explain every year why the continued appointment of the investment manager is in the interests of shareholders.
However the AITC code adds the board and chairman should be brought into the process of structuring a new trust launch at an early stage in order to satisfy themselves the proposed new company is fundamentally sound and has reason to be brought to market.
It also lays down guidelines for board scrutiny of trust management, stressing the importance of regular reviews of share price and NAV performance, gearing, asset allocation, investor relations and overall strategy.
The AITC suggests the board discuss whether it is in shareholders' interests for the trust to continue in its present form, or even at all, and consider regular continuation votes. Another key recommendation is that all holdings in other investment companies should be disclosed on a monthly basis, with attention drawn explicitly to any material crossholdings. This addresses another factor identified by the Treasury Committee as central to the failure of a number of split-capital trusts. Even so it stops well short of the FSA's proposal to prevent closed-end funds from putting more than 10% of their assets in other similar vehicles
The issue of corporate governance and the draft code will be debated at the AITC's conference for directors on 4 February, after which a final version will be produced.
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